Video of how to do it.
First off we need to convert our image to BMP (bitmap) format. Open your jpeg (or other format) image into Microsoft Paint.
Then file/ save as/ save as type/ 24 color bitmap. That's it we have our bitmap image. See second pic.
Now right click on the folder that you want to change the icon. Select properties. Click the customise tab. Select change icon. Select browse. Change files of type from icon files to all files. Locate the bmp image we created earlier. Hit OK.
That's it done. Bear in mind that your image is going to be shrunk a lot when it becomes an icon so it is best to chose an image that is well defined.
Alternatively download the excellent IrfanView. This software enables you to save jpeg as ico as well as many other features including making the background of your icon transparent.